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Trading Hours
Forex is traded 24 hours a day and 5 days a week, which offers a major
advantage over equities trading. Whether it's 6pm or
6am, somewhere in the world there are always buyers
and sellers actively trading foreign currencies.
Traders can always respond to breaking news
immediately, and P&L is not affected by after hours
earning reports or analyst conference calls.
After
hours trading for U.S. equities brings with it
several limitations. ECN's (Electronic Communication
Networks), also called matching systems, exist to
bring together buyers and sellers - when possible.
However, there is no guarantee that every trade will
be executed, nor at a fair market price. Quite
frequently, traders must wait until the market opens
the following day in order to receive a tighter
spread.
At $1.9 Trillion per day, Forex is the most traded
market in the world.
The sheer volume of
Forex helps to facilitates price stability in most
market conditions. What's more, almost 85% of all
currency transactions involve the 7 major currency
pairs.
Up to 200:1 Leverage
With more buying power,
you can increase your total return on investment
with less cash outlay. Of course, increasing
leverage increases risk. With $1,000 cash in a
margin account that allows 200:1 leverage (.5%), you
can trade up to $200,000 in notional value.
100:1 leverage is commonly available from online FX
dealers, which substantially exceeds the common 2:1
margin offered by equity brokers. At 100:1, traders
post $1,000 margin for a $100,000 position, or 1%.
Under some conditions, leverage can be increased to
200:1.
While
certainly not for everyone, the substantial leverage
available from online currency trading firms is a
powerful tool. Rather than merely
loading up on risk as many people incorrectly
assume, leverage is essential in the Forex market.
This is because the average daily percentage move of
a major currency is less than 1%, whereas a stock
can easily have a 10% price move on any given day.
The most
effective way to manage the risk associated with
margined trading is to diligently follow a
disciplined trading style that consistently utilizes
stop and limit orders. Devise and adhere to a system
where your controls kick-in when emotion might
otherwise take over.
Lower
Transaction Costs
It is much more cost-efficient to trade Forex in
terms of both commissions and transaction fees.
Commissions for stock trades range from $7.95-$29.95
per trade with online discount brokers and up to $100 or
more per trade with full service brokers.
Forex.ca is compensated through
the bid/ask spread. Increasing leverage increases
risk.
Another
important point to consider is the width of the
bid/ask spread. Regardless of deal size, forex
dealing spreads are normally 5 pips or less (a pip
is .0005 US cents). In general, the width of the
spread in a forex transaction is less than 1/10 that
of a stock transaction, which could include a .125
(1/8) wide spread.
Trading opportunities in rising and falling markets
In every open FX position, an investor is long in
one currency and short the other. A short position
is one in which the trader sells a currency in
anticipation that it will depreciate. This means
that potential exists in a rising as well as a
falling market.
The
ability to sell currencies without any limitations
is another distinct advantage over equity trading.
In the US equity markets, it is much more difficult
to establish a short position due to the Zero Up
tick
rule, which prevents investors from shorting a stock
unless the immediately preceding trade was equal to
or lower than the price of the short sale.
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